In September 2018, a startup called Compound Labs launched a lending protocol on Ethereum. The idea was simple but revolutionary: create a market where users could lend cryptocurrency to earn interest, or borrow cryptocurrency by posting collateral — all without any humans involved. Everything would be handled by smart contracts, with interest rates adjusting automatically based on supply and demand.
Compound’s founder, Robert Leshner, was a Bain & Company consultant turned crypto entrepreneur. He saw that crypto lacked one of the most basic financial services: a money market. Lending and borrowing are foundational activities in traditional finance, but in crypto they were either not available or required trusting centralized exchanges. Compound wanted to change that.
The protocol worked like this: users deposit supported tokens (like USDC, DAI, or ether) into Compound’s smart contracts. They immediately start earning interest, paid in the same token. Borrowers can take out loans from the same pool, posting other crypto as collateral (over-collateralized, typically 150% or more). Interest rates adjust automatically — when demand for borrowing is high, rates go up, which attracts more lenders and discourages borrowers, bringing the market back into balance.
In June 2020, Compound launched COMP, its governance token. The token was distributed to users who interacted with the protocol — both lenders and borrowers. This kicked off what became known as “yield farming.” Users realized that they could deposit money to earn interest AND receive COMP tokens worth even more. Rational actors began maximizing their COMP rewards by lending and borrowing in complex loops. Total value locked in Compound spiked from around $100 million to over $700 million in weeks.
Compound’s token launch triggered the DeFi Summer of 2020. Every major DeFi protocol rushed to launch governance tokens and distribute them to users. Yield farming became a phenomenon, with yields reaching triple digits on some protocols. The crypto community was seized by excitement. Real innovation was happening on Ethereum, creating genuinely useful financial products that didn’t exist in the traditional system. Compound had started it all.
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